What Is the Role of the Central Clearing Counterparty (CCP) in Reducing Systemic Risk in Derivatives Trading?

A CCP acts as a central intermediary, becoming the buyer to every seller and the seller to every buyer through a process called novation. It guarantees the settlement of trades, even if one counterparty defaults.

By collecting collateral (margin) and managing a pooled default fund, the CCP mutualizes and significantly reduces the risk of a systemic failure in the derivatives market.